UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number 0-22787
FOUR OAKS FINCORP, INC.
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(Name of small business issuer in its charter)
North Carolina 56-2028446
- ------------------------------------ ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
6144 U S 301 South
Four Oaks, North Carolina
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(Address of principal executive offices)
27524
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(Zip Code)
Issuer's telephone number: (919) 963-2177
--------------
Securities registered under Section 12(b) of the Act: NONE
----
Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days: (X) YES ( ) NO
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
$20,080,716
-----------------------------
(Issuer's revenues for its most recent fiscal year)
$19,435,528
-----------------------------
(Aggregate value of voting and non-voting common equity held by
nonaffiliates of the registrant based on book value (due to lack of public
market) of Common Stock as of December 31, 1999)
1,366,530
-----------------------------
(Number of shares of Common Stock, par value $1.00 per share,
outstanding as of March 6, 2000)
Documents Incorporated by Reference Where Incorporated
- ----------------------------------- ------------------
(1) Annual Report to Shareholders for Parts II and III
Fiscal Year Ended December 31, 1999
(2) Proxy Statement for the Annual Part III
Meeting of Shareholders to be held April 24, 2000
<PAGE>
PART I
Item 1 - Business.
- ------------------
On February 5, 1997, Four Oaks Bank & Trust Company (referred to herein
as the "bank") formed Four Oaks Fincorp, Inc. for the purpose of serving as a
holding company for the bank. We have no significant assets other than the
capital stock of the bank. Our corporate offices and those of the bank are
located at 6144 US 301 South, Four Oaks, North Carolina 27524.
The bank was incorporated under the laws of the State of North Carolina
in 1912. The bank is not a member of the Federal Reserve System. In addition to
the main office, the bank has an additional branch in Four Oaks and a branch
office in Clayton, North Carolina at 102 East Main Street, two in Smithfield,
North Carolina at 128 North Second Street, and 403 South Bright Leaf Boulevard,
one in Garner, North Carolina at 200 Glen Road and one in Benson, North Carolina
at 200 E. Church Street.
The bank is a community bank engaged in the general commercial banking
business in Johnston County, North Carolina which is located in Eastern North
Carolina. Johnston County is contiguous to Wake, Wayne, Wilson, Harnett, Sampson
and Nash counties.
As of December 31, 1999, the bank had assets of $231,464,628, net loans
outstanding of $164,226,086 and deposits of $194,710,937. The bank has enjoyed
considerable growth over the past five years as evidenced by the 98% increase in
assets, the 22% increase in net loans outstanding, and the 91% increase in
deposits since December 31, 1994.
The bank provides a full range of banking services, including such
services as checking accounts, savings accounts, NOW accounts, money market
accounts, certificates of deposit, a student checking and savings program; loans
for businesses, agriculture, real estate, personal uses, home improvement and
automobiles; equity lines of credit; credit cards; individual retirement
accounts; discount brokerage services; safe deposit boxes; bank money orders;
electronic funds transfer services, including wire transfers; traveler's checks;
and free notary services to all bank customers. In addition, the bank provides
automated teller machine access to its customers for cash withdrawals through
the services of the HONOR and CIRRUS networks which offer customers access to
automated teller machines nationwide. At present, the bank does not provide the
services of a trust department.
The majority of the bank's customers are individuals and small to
medium-size businesses located in Johnston County and surrounding areas. The
deposits and loans are well diversified with no material concentration in a
single industry or group of related industries. There are no seasonal factors
that would have any material adverse effect on the bank's business, and the bank
does not rely on foreign sources of funds or income.
From its headquarters located in Four Oaks and its six offices located
in Four Oaks, Clayton, Smithfield, Garner and Benson, the bank serves a major
portion of Johnston County. Johnston County has a diverse economy and is not
dependent on any one particular industry. The leading industries in the area
include electronics, pharmaceutical, textile, agriculture, livestock, and
poultry.
Commercial banking in North Carolina is extremely competitive due in
large part to statewide branching. The bank competes in its market area with
some of the largest banking organizations in the state and other financial
institutions such as federally and state-chartered savings and loan institutions
and credit unions as well as consumer finance companies, mortgage companies and
other lenders engaged in the business of extending credit. Many of the bank's
competitors have broader geographic markets and higher lending limits than the
bank and are also able to provide more services and make greater use of media
advertising.
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Interstate banking in North Carolina and other Southeastern states has
greatly increased the size and financial resources of some of the bank's
competitors. In addition, as a result of interstate banking, out-of-state
commercial banks may compete in North Carolina by acquiring North Carolina banks
and thus increase the prospects for additional competition in North Carolina.
See "Holding Company Regulation" below.
Despite the competition in its market area, the bank believes that it
has certain competitive advantages which distinguish it from its competition.
The bank believes that its primary competitive advantages are its strong local
identity and affiliation with the community and its emphasis on providing the
very best service possible at reasonable and competitive prices. The bank
believes that it offers customers modern, high-tech banking services without
forsaking community values such as prompt, personal service and friendliness.
Amounts spent on research activities relating to the development or improvement
of services have been immaterial over the past two years. At December 31, 1999,
the bank employed 93 full time equivalent employees.
The following table sets forth certain financial data and ratios with
respect to the bank for the years ended December 31, 1999, 1998, and 1997. This
information should be read in conjunction with and is qualified in its entirety
by reference to the more detailed audited financial statements and notes thereto
which accompany this report:
1999 1998 1997
---- ---- ----
(In thousands, except ratios)
Net Income $ 3,096 $ 2,578 $ 2,122
Average equity capital accounts $ 20,827 $ 18,314 $ 15,495
Ratio of net income to average equity
capital accounts 14.87% 14.08% 13.69%
Average daily total deposits $191,307 $180,763 $154,397
Ratio of net income to average daily
total deposits 1.62% 1.43% 1.37%
Average daily loans $164,863 $153,244 $130,376
Ratio of average daily loans to average
daily total deposits 86.189% 84.78% 84.44%
Governmental Regulation
- -----------------------
Holding companies, banks and many of their non-bank affiliates are
extensively regulated under both federal and state law. The following is a brief
summary of certain statutes, rules and regulations affecting us and the bank.
This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referred to below and is not intended to be
an exhaustive description of the statutes or regulations applicable to our
business or the business of the bank. Supervision, regulation and examination of
us and the bank by bank regulatory agencies is intended primarily for the
protection of the bank's depositors rather than our shareholders.
Holding Company Regulation
--------------------------
GENERAL. We are a holding company registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956 (the "BHCA"). As such, we are subject to the supervision, examination and
reporting requirements contained in the BHCA and the regulation of the Federal
Reserve. The bank is also subject to the BHCA. The BHCA requires that a bank
holding company obtain the prior approval of the Federal Reserve before (i)
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any bank, (ii) taking any action that causes a bank to
become a
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subsidiary of the bank holding company, (iii) acquiring all or substantially all
of the assets of any bank or (iv) merging or consolidating with any other bank
holding company.
The BHCA generally prohibits a bank holding company, with certain
exceptions, from engaging in activities other than banking, or managing or
controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be closely
related to banking, or managing or controlling banks, as to be a proper incident
thereto. In determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. For
example, banking, operating a thrift institution, extending credit or servicing
loans, leasing real or personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance underwriting activities have all been determined by regulations of the
Federal Reserve to be permissible activities.
Pursuant to delegated authority, the Federal Reserve Bank of Richmond
has authority to approve certain activities of holding companies within its
district, including us, provided the nature of the activity has been approved by
the Federal Reserve. Despite prior approval, the Federal Reserve has the power
to order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that bank holding company.
RECENT DEVELOPMENTS. On November 12, 1999, the President of the United
States signed into law the Gramm-Leach-Bliley Act (the "GLB"), which alters the
regulatory framework for banking and other financial services companies. The GLB
creates a new type of holding company called a "financial holding company." The
new financial holding company structure allows banks, insurance companies, and
securities firms to affiliate within a single entity, provided that the
financial holding company satisfies and maintains certain new regulatory
standards. Bank holding companies that meet these standards may elect to become
financial holding companies.
At the present time, we have elected to remain a bank holding company,
and therefore we remain subject to the same regulatory framework as before the
enactment of the GLB. However, the financial holding company structure created
by the GLB permits insurance companies or securities firms operating under the
financial holding company structure to acquire us, and, if we elect to become a
financial holding company in the future, we could acquire insurance companies or
securities firms.
In addition to creating the more flexible financial holding company
structure, the GLB introduced several additional customer privacy protections
that will apply to us and the bank. Federal regulators have issued for comment a
draft of proposed privacy regulations implementing these protections. Pursuant
to the GLB's rulemaking provisions, regulations must be adopted by May 12, 2000,
and institutions must begin privacy disclosures under the GLB within six months
of adoption of such regulations. The GLB's privacy provisions require financial
institutions to, among other things, (i) establish and annually disclose a
privacy policy, (ii) give consumers the right to opt out of disclosures to
nonaffiliated third parties, with certain exceptions, (iii) refuse to disclose
consumer account information to third-party marketers and (iv) follow regulatory
standards to protect the security and confidentiality of consumer information.
MERGERS AND ACQUISITIONS. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions
of banks and bank holding companies without geographic limitation, subject to
any state requirement that the bank has been organized for a minimum period of
time,
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<PAGE>
not to exceed five years, and the requirement that the bank holding company,
prior to, or following the proposed acquisition, controls no more than 10% of
the total amount of deposits of insured depository institutions in the U.S. and
no more than 30% of such deposits in any state (or such lesser or greater amount
set by state law).
In addition, the IBBEA permits a bank to merge with a bank in another
state as long as neither of the states has opted out of the IBBEA prior to May
31, 1997. The state of North Carolina has "opted in" to such legislation,
effective June 22, 1995. In addition, a bank may establish and operate a DE NOVO
branch in a state in which the bank does not maintain a branch if that state
expressly permits DE NOVO interstate branching. As a result of North Carolina
having opted-in, unrestricted interstate DE NOVO branching is permitted in North
Carolina.
ADDITIONAL RESTRICTIONS AND OVERSIGHT. Subsidiary banks of a bank
holding company are subject to certain restrictions imposed by the Federal
Reserve on any extensions of credit to the bank holding company or any of its
subsidiaries, investments in the stock or securities thereof and the acceptance
of such stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. An example of a prohibited tie-in would be
any arrangement that would condition the provision or cost of services on a
customer obtaining additional services from the bank holding company or any of
its other subsidiaries.
The Federal Reserve may issue cease and desist orders against bank
holding companies and non-bank subsidiaries to stop actions believed to present
a serious threat to a subsidiary bank. The Federal Reserve also regulates
certain debt obligations, changes in control of bank holding companies and
capital requirements.
Under the provisions of the North Carolina law, we are registered with
and subject to supervision by the North Carolina Commissioner of Banks.
CAPITAL REQUIREMENTS. The Federal Reserve has established risk-based
capital guidelines for bank holding companies and state member banks. The
minimum standard for the ratio of capital to risk-weighted assets (including
certain off balance sheet obligations, such as standby letters of credit) is
eight percent. At least half of this capital must consist of common equity,
retained earnings and a limited amount of perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less certain
goodwill items ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist
of mandatory convertible debt securities and a limited amount of other preferred
stock, subordinated debt and loan loss reserves.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent.
The guidelines also provide that bank holding companies experiencing
significant growth, whether through internal expansion or acquisitions, will be
expected to maintain strong capital ratios substantially above the minimum
supervisory levels without significant reliance on intangible assets. The same
heightened requirements apply to bank holding companies with supervisory,
financial, operational or managerial weaknesses, as well as to other banking
institutions if warranted by particular circumstances or the institution's risk
profile. Furthermore, the guidelines indicate that the Federal Reserve will
continue to consider a "tangible Tier 1 Leverage Ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve has not advised us of any specific minimum Leverage Ratio or tangible
Tier 1 Leverage Ratio applicable to us.
5
<PAGE>
As of December 31, 1999, we had Tier 1 risk-adjusted, total regulatory
capital and leverage capital of approximately 12.70%, 13.95% and 9.79%,
respectively, all in excess of the minimum requirements.
Bank Regulation
---------------
The bank is subject to numerous state and federal statutes and
regulations that affect its business, activities, and operations, and is
supervised and examined by the North Carolina Commissioner of Banks and the
Federal Reserve. The Federal Reserve and the North Carolina Commissioner of
Banks regularly examine the operations of banks over which they exercise
jurisdiction. They have the authority to approve or disapprove the establishment
of branches, mergers, consolidations, and other similar corporate actions, and
to prevent the continuance or development of unsafe or unsound banking practices
and other violations of law. The Federal Reserve and the North Carolina
Commissioner of Banks regulate and monitor all areas of the operations of banks
and their subsidiaries, including loans, mortgages, issuances of securities,
capital adequacy, loss reserves, and compliance with the Community Reinvestment
Act of 1977 (the "CRA") as well as other laws and regulations. Interest and
certain other charges collected and contracted for by banks are also subject to
state usury laws and certain federal laws concerning interest rates.
The deposit accounts of the bank are insured by the Bank Insurance Fund
(the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a
maximum of $100,000 per insured depositor. The FDIC issues regulations and
conducts periodic examinations, requires the filing of reports and generally
supervises the operations of its insured banks. This supervision and regulation
is intended primarily for the protection of depositors. Any insured bank that is
not operated in accordance with or does not conform to FDIC regulations,
policies, and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.
Under the North Carolina Business Corporation Act, we may not pay a
dividend or distribution, if after giving it effect, we would not be able to pay
our debts as they become due in the usual course of business or our total assets
would be less than our liabilities. In general, our ability to pay cash
dividends is dependent upon the amount of dividends paid by the bank. The
ability of the bank to pay dividends to us is subject to statutory and
regulatory restrictions on the payment of cash dividends, including the
requirement under the North Carolina banking laws that cash dividends be paid
only out of undivided profits and only if the bank has surplus of a specified
level. The Federal Reserve also imposes limits on the bank's payment of
dividends.
Like us, the bank is required by federal regulations to maintain
certain minimum capital levels. The levels required of the bank are the same as
those required of us. At December 31, 1999, the bank had Tier 1 risk-adjusted,
total regulatory capital and leverage capital of approximately 12.14%, 13.39%
and 9.33%, respectively, all in excess of the minimum requirements.
The bank is subject to insurance assessments imposed by the FDIC.
Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule
providing for annual assessment rates ranging from 0% to .27% of an
institution's average assessment base, applicable to institutions insured by
both the BIF and the Savings Association Insurance Fund ("SAIF"). The actual
assessment to be paid by each insured institution is based on the institution's
assessment risk classification, which focuses on whether the institution is
considered "well capitalized," "adequately capitalized" or "under capitalized,"
as such terms are defined in the applicable federal regulations. Within each of
these three risk classifications, each institution will be assigned to one of
three subgroups based on supervisory risk factors. In particular, regulators
will assess supervisory risk based on whether the institution is financially
sound with only a few minor weaknesses (Subgroup A), whether it has weaknesses
which, if not corrected, could result in an increased risk of loss to the BIF
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(Subgroup B) or whether such weaknesses pose a substantial risk of loss to the
BIF unless corrective action is taken (Subgroup C). The FDIC also is authorized
to impose one or more special assessments in an amount deemed necessary to
enable repayment of amounts borrowed by the FDIC from the United States Treasury
Department and, beginning in 1997, all banks are required to pay additional
annual assessments. The current rate for this additional assessment is .021%.
Banks are also subject to the CRA, which requires the appropriate
federal bank regulatory agency, in connection with its examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate-income neighborhoods. Each institution is
assigned one of the following four ratings of its record in meeting community
credit needs: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
Effective May 12, 2000, the GLB's "CRA Sunshine Requirements" call for
financial institutions to disclose publicly certain written agreements made in
fulfillment of the CRA. Banks that are parties to such agreements also must
report to federal regulators the amount and use of any funds expended under such
agreements on an annual basis, along with such other information as regulators
may require. This annual reporting requirement is effective for any agreements
made after May 12, 2000.
Monetary Policy and Economic Controls
-------------------------------------
Both us and the bank are directly affected by governmental policies and
regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the money
supply which, in turn, affects banks' lending abilities by increasing or
decreasing the cost and availability of funds to banks. The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in United
States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits, and
limitations on interest rates that banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types
of deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates has generally increased banks' cost of funds and made them more
sensitive to fluctuations in money market rates. In view of the changing
conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or our
business and earnings of or that of the bank. As a result, banks, including the
bank, face a significant challenge to maintain acceptable net interest margins.
7
<PAGE>
Our Executive Officers
----------------------
The following table sets forth certain information with respect to our
executive officers:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH FOUR OAKS FINCORP,
YEAR FIRST INC. AND BUSINESS EXPERIENCE
NAME AGE EMPLOYED DURING PAST FIVE YEARS
- ---- --- -------- ----------------------
<S> <C> <C> <C>
Ayden R. Lee, Jr. 51 1980 Chief Executive Officer, President and
Director of Four Oaks Fincorp, Inc. and Four
Oaks Bank & Trust Company
Clifton L. Painter 50 1986 Senior Executive Vice President, Chief
Operating Officer of Four Oaks Fincorp, Inc.
and Four Oaks Bank & Trust Company
Nancy S. Wise 44 1991 Senior Vice President, Chief Financial Officer
of Four Oaks Fincorp, Inc. and Four Oaks Bank
& Trust Company
W. Leon Hiatt, III 32 1994 Senior Vice President of Four Oaks Fincorp,
Inc. and Four Oaks Bank & Trust Company, Loan
Administrator of Four Oaks Bank & Trust
Company. From March 1990 until joining the
bank, Mr. Hiatt served as a Financial
Institutions Examiner for the FDIC
</TABLE>
Item 2 - Properties.
- --------------------
The bank owns its main office which is located at 6144 U S 301 South,
Four Oaks, North Carolina. The main office which was constructed by the Bank in
1985 is a 12,000 square foot facility on 1.64 acres of land. The bank leases an
additional branch office in downtown Four Oaks located at 111 North Main Street
from M.S. Canaday, who is one of our directors as well as a director of the
bank. Under the terms of the lease, which the bank believes to be arms-length,
the bank paid $806 per month in rent in 1999. The term of the lease is currently
six years beginning January 1, 1994 with annual increases based on the Consumer
Price Index. The bank owns a 5,000 square foot facility renovated in 1992 on
1.15 acres of land located at 5987 U S 301 South, Four Oaks, North Carolina
which houses the training center and the bank's wide area network central link.
In addition, the bank owns the following:
LOCATION YEAR BUILT PRESENT FUNCTION SQUARE FEET
- -------- ---------- ---------------- -----------
102 East Main Street 1986 Branch Office 4,200
Clayton, North Carolina
200 E. Church Street 1987 Branch Office 2,000
Benson, North Carolina
128 North Second Street 1991 Branch Office 3,400
Smithfield, North Carolina
403 S. Bright Leaf Blvd. 1995 Limited-Service Facility 720
Smithfield, North Carolina
200 Glen Road 1996 Branch Office 3,600
Garner, North Carolina
8
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Item 3 - Legal Proceedings.
- ---------------------------
We are not involved in any material legal proceedings at the present
time.
Item 4 - Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
This information is incorporated by reference from Page 39, "Corporate
Information" of our Annual Report to Shareholders included as Exhibit 13.1.
Item 6 - Management's Discussion and Analysis or Plan of Operation.
- -------------------------------------------------------------------
This information is incorporated by reference from Pages 11-17,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of our Annual Report to Shareholders included as Exhibit 13.1.
Item 7 - Financial Statements.
- ------------------------------
This information is incorporated by reference from Pages 18-33, of our
Annual Report to Shareholders included as Exhibit 13.1.
Item 8 - Changes In and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance With Section 16(a) of the Exchange Act.
- --------------------------------------------------
Director information is incorporated by reference from Pages 5 and 6,
"Election of Directors" and Pages 9 and 10, "Section 16(a) Beneficial Ownership
Reporting Compliance," in our Proxy Statement for the Annual Meeting of
Shareholders to be held April 24, 2000. Information on our executive officers is
included under the caption "Our Executive Officers" on Page 8 of this report.
Item 10 - Executive Compensation.
- ---------------------------------
This information is incorporated by reference from Pages 7-10,
"Executive Compensation," in our Proxy Statement for the Annual Meeting of
Shareholders to be held April 24, 2000.
Item 11 - Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
This information is incorporated by reference from Pages 3 and 4,
"Security Ownership of Management and Certain Beneficial Owners," in our Proxy
Statement for the Annual Meeting of Shareholders to be held April 24, 2000.
9
<PAGE>
Item 12 - Certain Relationships and Related Transactions.
- ---------------------------------------------------------
This information is incorporated by reference from Page 9, "Executive
Compensation-Certain Transactions," in our Proxy Statement for the Annual
Meeting of Shareholders to be held April 24, 2000.
Item 13 - Exhibits and Reports on Form 8-K.
- -------------------------------------------
(a) Financial Statements and Schedules.
The following financial statements are incorporated by reference herein
from our Annual Report to Shareholders included as Exhibit 13.1 to this
Form 10-KSB.
<TABLE>
<CAPTION>
ANNUAL
REPORT PAGE
-----------
<S> <C> <C>
(i) Report of Independent Accountants. 18
(ii) Consolidated Balance Sheets, December 31, 1999 and 1998. 19
(iii) Consolidated Statements of Operations for the years ended 20
December 31, 1999, 1998 and 1997.
(iv) Consolidated Changes in Shareholders' Equity for the years 21
ended December 31, 1999, 1998 and 1997.
(v) Consolidated Statements of Cash Flows for the years ended 22
December 31, 1999, 1998 and 1997.
(vi) Notes to Consolidated Financial Statements. 23-33
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ending December
31, 1999.
(c) Exhibits. The following exhibits are filed as part of this annual
report. Management contracts or compensatory plans or arrangements are
listed in Exhibits 10.1, 10.2, 10.3, 10.4 and 10.6 below:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
2(1) Agreement and Plan of Reorganization and Merger by and between Four Oaks Bank & Trust
Company and Four Oaks Fincorp, Inc. dated February 24, 1997
3.1(1) Articles of Incorporation of Four Oaks Fincorp, Inc.
3.2(1) Bylaws of Four Oaks Fincorp, Inc.
4(1) Specimen of certificate for Four Oaks Fincorp, Inc. Common Stock
10.1(2) Employment Agreement with Ayden R. Lee, Jr.
10.2(2) Severance Compensation Agreement with Ayden R. Lee, Jr.
10.3(1) Nonqualified Stock Option Plan
10
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10.4(1) Employee Stock Purchase and Bonus Plan
10.5(1) Dividend Reinvestment and Stock Purchase Plan
10.6(3) Four Oaks Bank & Trust Company Supplemental Executive Retirement Plan
13 Portions of the Annual Report to Shareholders for the fiscal year ended December 31,
1999, which are incorporated herein by reference.
21 Subsidiaries of Four Oaks Fincorp, Inc.
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
</TABLE>
- ---------------------
(1) Filed as an exhibit to the Form 8-K12G3 filed with the SEC on July 1, 1997
and incorporated herein by reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the period
ended June 30, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-KSB for the period
ended December 31, 1998 and incorporated herein by reference.
FORWARD LOOKING INFORMATION
Information set forth in this Annual Report on Form 10-KSB under the
caption "Business" and incorporated by reference herein from our Annual Report
to Shareholders contains various "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which statements represent our
judgment concerning the future and are subject to risks and uncertainties that
could cause our actual operating results and financial position to differ
materially. Such forward looking statements can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereof or
comparable terminology.
We caution that any such forward looking statements are further
qualified by important factors that could cause our actual operating results to
differ materially from those in the forward looking statements, including,
without limitation, the effects of future economic conditions, governmental
fiscal and monetary policies, legislative and regulatory changes, the risks of
changes in interest rates on the level and composition of deposits, the effects
of competition from other financial institutions, the failure of assumptions
underlying the establishment of the allowance for possible loan losses, the low
trading volume of our common stock, other considerations described in connection
with specific forward looking statements and other cautionary elements specified
in documents incorporated by reference in this Annual Report on Form 10-KSB.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: March 19, 2000 By: /s/ Ayden R. Lee, Jr.
-------------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 19, 2000 /s/ Ayden R. Lee, Jr.
-------------------------------------
Ayden R. Lee, Jr.
President, Chief Executive Officer
and Director
Date: March 19, 2000 /s/ Nancy S. Wise
-------------------------------------
Nancy S. Wise
Senior Vice President and Chief
Financial Officer
Date: March 19, 2000 /s/ William J. Edwards
-------------------------------------
William J. Edwards
Director
Date: March 19, 2000 /s/ Warren L. Grimes
-------------------------------------
Warren L. Grimes
Director
Date: March 19, 2000 /s/ R. Max Raynor, Jr.
-------------------------------------
Dr. R. Max Raynor, Jr.
Director
Date: March 19, 2000 /s/ Percy Y. Lee
-------------------------------------
Percy Y. Lee
Director
Date: March 19, 2000 /s/ Merwin S. Canaday
-------------------------------------
Merwin S. Canaday
Director
Date: March 19, 2000 /s/ Paula C. Bowman
-------------------------------------
Paula C. Bowman
Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
2(1) Agreement and Plan of Reorganization and Merger by and between Four Oaks Bank & Trust
Company and Four Oaks Fincorp, Inc. dated February 24, 1997
3.1(1) Articles of Incorporation of Four Oaks Fincorp, Inc.
3.2(1) Bylaws of Four Oaks Fincorp, Inc.
4(1) Specimen of certificate for Four Oaks Fincorp, Inc. Common Stock
10.1(2) Employment Agreement with Ayden R. Lee, Jr.
10.2(2) Severance Compensation Agreement with Ayden R. Lee, Jr.
10.3(1) Nonqualified Stock Option Plan
10.4(1) Employee Stock Purchase and Bonus Plan
10.5(1) Dividend Reinvestment and Stock Purchase Plan
10.6(3) Four Oaks Bank & Trust Company Supplemental Executive Retirement Plan
13 Portions of the Annual Report to Shareholders for the fiscal year ended December 31,
1999, which are incorporated herein by reference.
21 Subsidiaries of Four Oaks Fincorp, Inc.
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
</TABLE>
- ---------------------
(1) Filed as an exhibit to the Form 8-K12G3 filed with the SEC on July 1, 1997
and incorporated herein by reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the period
ended June 30, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-KSB for the period
ended December 31, 1998 and incorporated herein by reference.
Management's Discussion
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of Four Oaks Fincorp, Inc. (the "Company") and should be read
in conjunction with the Companys Consolidated Financial Statements and Notes
thereto. Additional discussion and analysis related to fiscal 1999 is contained
in the Company's Quarterly Reports on form 10QSB.
GENERAL
Four Oaks Fincorp Inc. (The Company) has experienced significant sustained
growth in assets and deposits over the last five years. Assets increased from
$116,674,000 at December 31, 1994 to $231,465,000 at December 31, 1999, while
total deposits increased from $101,978,000 to $194,711,000 over that same span.
In addition, for 64 consecutive years the Company (prior to 1997, the Companys
wholly owned subsidiary, Four Oaks Bank & Trust Company [the "Bank"]) has paid
dividends. For the past five years dividends have averaged 22% of the Company's
average net income.
Interest rates on deposits and loans are set at competitive rates while
maintaining spreads of 4.25% and 3.93% in 1999 and 1998, respectively, between
interest earned on average loans and investments and interest paid on average
interest bearing deposits and short-term borrowing. Gross loans have increased
from $74,769,000 at December 31, 1994 to $166,576,000 at December 31, 1999,
while average net annual chargeoffs over the last five years were $404,000. The
sustained growth provided by operations resulted in increases in total assets of
8%, 13%, and 20% for 1999, 1998, and 1997, respectively.
Gross loans grew 7% and 11% in 1999 and 1998, respectively. Total
investments (including federal funds sold and interest bearing bank balances)
increased 8% and 19% in 1999 and 1998, respectively. The Company closely
monitors changes in the financial markets in order to maximize the yield on its
assets. The growth in loans and investments is funded by the growth in total
deposits of 3% and 12% in 1999 and 1998 and net income of $3,906,000 in 1999 and
$2,578,000 in 1998. Net income for 1999 and 1998 increased 20% and 22%,
respectively, due to favorable interest margins and effective cost containment
measures.
Management historically has monitored and controlled increases in overhead
expenses while being committed to developing the skills and enhancing the
professionalism of the Company's employees. Employee turnover has been minimal,
while the number of full-time equivalent employees has increased from 59 at
December 31, 1994 to 93 at December 31, 1999.
RESULTS OF OPERATIONS
Interest income increased 5% in 1999, 17% in 1998, and 22% in 1997. In
1999 and 1998, loan volumes were at record levels all year with much less
seasonal fluctuation than we have had historically. This steady loan growth
resulted primarily from increased loan demand in our markets. Average gross
loans were approximately $164,862,000 in 1999, $153,244,000 in 1998 and
$130,376,000 in 1997. Average investments were approximately $39,526,000 in
1999, $35,286,000 in 1998 and $33,802,000 in 1997. Market rates fluctuated as
average prime rates ranged from 8% to 9% during 1999, 1998 and 1997. However,
growth in 1999, 1998 and 1997 interest income is primarily due to higher
volumes. Interest expense decreased 6% in 1999 and increased 15% in 1998 and 24%
in 1997. Deposit rates remained relatively steady from 1997 to 1998 but declined
during 1999 as Federal Home Loan Bank borrowings were substituted as a funding
source rather than inflating certificate of deposit rates. Noninterest income
increased 21% and 15% primarily due to fees generated on loan products in 1999
and 1998. While the Banks stated service charges and fees have not significantly
increased, it's related income has risen due to higher account volumes and
increased collection efforts. Noninterest expenses have increased from
$5,175,000 in 1997 to $5,914,000 in 1998 and $6,659,000 in 1999. These increases
are the result of increased operating expenses caused by the growth of the Bank.
The Bank's growth has resulted in more employees, increased facilities and
equipment costs, and an increase in the volume of transactions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position is primarily dependent upon the Banks
need to respond to loan demand, the short-term demand for funds caused by
withdrawals from deposit accounts (other than time deposits) and the liquidity
of its assets. The Bank's primary liquidity sources include cash and amounts due
from other banks, federal funds sold, and U.S. Government Agency and other
short-term investment securities. In addition, the Bank has the ability to
borrow funds from the Federal Reserve Bank and the Federal Home Loan Bank of
Atlanta and to purchase federal funds from other financial institutions. The
Company's management believes its liquidity sources are adequate to meet its
operating needs and the operating needs of the Bank. Total shareholders' equity
was $21,897,000 or 10% of total assets at December 31, 1999 and $19,543,000 or
9% of total assets at December 31, 1998.
INFLATION
The effect of inflation on financial institutions differs somewhat from
the effect it has on other businesses. The performances of banks, with assets
and liabilities that are primarily monetary in nature, are affected more by
changes in interest rates than by inflation. Interest rates generally increase
as the rate of inflation increases, but the magnitude of the change in rates may
not be the same. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience
above average growth in assets, loans and deposits. Also, general increases in
the price of goods and services will generally result in increased operating
expenses.
INCOME TAXES
Income taxes, as a percentage of income before income taxes, for 1999,
1998 and 1997 were 37%, 34%, and 34%, respectively. These changes were the
result of management's redirection of funds between loans and different types of
taxable and tax exempt interest-bearing assets in response to economic
conditions and the Bank's liquidity requirements.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following schedule presents average balance sheet information for the
years 1999 and 1998, along with related interest earned and average yields for
interest-earning assets and the interest paid and average rates for
interest-bearing liabilities.
11
<PAGE>
MANAGEMENT'S DISCUSSION
AVERAGE DAILY BALANCES, INTEREST INCOME/EXPENSE, AVERAGE YIELD/RATE
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
----------------------------------------------------------------------
average interest average average interest average
daily income/ yield/ daily income/ yield/
balance expense rate balance expense rate
--------- --------- ---- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,807 $ 5,502
Interest bearing bank balances 2,914 $ 147 5.04% 3,394 $ 182 5.36%
Investments:
U.S. Treasuries and Agencies 34,947 2,086 5.97% 30,358 1,920 6.32%
Tax exempt(1) 3,900 200 5.13% 4,207 216 5.13%
Other investments 679 52 7.66% 721 52 7.21%
--------- --------- --------- ---------
Total investments(3) 39,526 2,338 5.92% 35,286 2,188 6.20%
--------- --------- --------- ---------
Commercial loans 21,055 2,011 9.55% 25,706 2,539 9.88%
Installment loans 34,957 3,440 9.84% 34,078 3,444 10.11%
Real estate loans 98,686 9,402 9.53% 84,015 8,170 9.72%
Equity lines 8,332 743 8.92% 7,715 718 9.31%
Overdraft lines and credit cards 1,833 255 13.91% 1,730 222 12.83%
--------- --------- --------- ---------
Gross loans(2) 164,863 15,851 9.61% 153,244 15,093 9.85%
Loan loss reserve (2,108) (1,911)
--------- --------- --------- ---------
Net loans 162,755 15,851 9.74% 151,333 15,093 9.97%
--------- --------- --------- ---------
Total fixed assets 4,814 5,840
Other assets 4,437 3,512
--------- --------- --------- ---------
Total assets $ 220,253 $ 18,336 8.32% $ 204,867 $ 17,463 8.52%
========= ========= ========= =========
Total interest earning assets $ 207,303 $ 18,336 8.85% $ 191,924 $ 17,463 9.10%
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS EQUITY
Deposits:
Demand $ 30,505 $ 26,872
NOW accounts 15,264 $ 146 .96% 14,623 $ 265 1.81%
Money markets 9,219 340 3.69% 7,815 319 4.08%
Savings 11,041 216 1.96% 10,413 280 2.69%
Time 125,278 6,657 5.31% 121,040 7,071 5.84%
--------- --------- --------- ---------
Total deposits 191,307 7,359 3.85% 180,763 7,935 4.39%
Borrowing 5,584 303 5.43% 3,343 189 5.65%
Other liabilities 2,535 2,447
--------- --------- --------- ---------
Total liabilities 199,426 7,662 3.84% 186,553 8,124 4.35%
--------- --------- --------- ---------
Common stock 1,356 1,333
Surplus 5,982 5,472
Undivided profits 13,709 11,350
Unrealized (gain) on securities (220) 159
--------- ---------
Total equity 20,827 18,314
--------- --------- --------- ---------
Total liabilities and equity $ 220,253 $ 7,662 3.48% $ 204,867 $ 8,124 3.97%
========= ========= ========= =========
Total interest bearing liabilities $ 166,386 $ 7,662 4.60% $ 157,234 $ 8,124 5.17%
========= ========= ========= =========
Net interest margin:
Total assets to total liabilities and equity 4.84% 4.55%
Interest earning assets to interest bearing liabilities 4.25% 3.93%
Net yield on interest earning assets $ 10,674 5.15% $ 9,339 4.87%
========= =========
</TABLE>
(1) Not computed on a tax equivalent basis.
(2) Includes non-accrual loans.
(3) Does not give effect to changes in fair value reflected in equity.
12
<PAGE>
Management's Discussion
CHANGES IN INTEREST INCOME AND EXPENSE BY CATEGORY AND RATE/VOLUME VARIANCES FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998. THE CHANGES DUE TO RATE AND VOLUME
WERE ALLOCATED ON THEIR ABSOLUTE VALUES.
<TABLE>
<CAPTION>
1999 versus 1998 1998 versus 1997
---------------- ----------------
amount due to amount due to
(in thousands) total increase change in: total increase change in:
(decrease) volume rate (decrease) volume rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income:
Loans $ 758 $ 1,144 $ (386) 2,328 $ 2,238 $ 90
Investments(1) 115 237 (122) 193 213 (20)
------- ------- ------- ------- ------- -------
Total interest income 873 1,381 (508) 2,521 2,451 70
------- ------- ------- ------- ------- -------
Expense:
NOW accounts (119) 12 (131) (33) 10 (43)
Money market 21 57 (36) 80 67 13
Savings (64) 17 (81) (15) 11 (26)
Time (414) 247 (661) 1,167 1,163 4
------- ------- ------- ------- ------- -------
Total paid on deposits (576) 333 (909) 1,199 1,251 (52)
Borrowings 114 127 (13) (121) (115) (6)
------- ------- ------- ------- ------- -------
Total interest expense (462) 460 (922) 1,078 1,136 (58)
------- ------- ------- ------- ------- -------
Net interest income $ 1,335 $ 921 $ 414 $ 1,443 $ 1,315 $ 128
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes federal funds sold and interest bearing bank balances.
INVESTMENT PORTFOLIO
The valuations of investment securities at December 31, 1999 and 1998 were (in
thousands, except ratios):
<TABLE>
<CAPTION>
Available for sale: Available for sale:
1999 1998
--------------------- ---------------------
amortized estimated amortized estimated
cost fair value cost fair value
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - $ - $ 2,499 $ 2,510
U.S. Government agency obligations:
All other 39,915 38,980 36,478 36,493
Securities issued by states and political
subdivisions in the U.S.:
Tax exempt securities 4,178 4,204 3,901 4,066
Other equity securities 696 696 622 622
------- ------- ------- -------
Total securities $44,789 $43,880 $43,500 $43,691
======= ======= ======= =======
Pledged securities $ 8,700 $ 9,259
======= =======
</TABLE>
<TABLE>
<CAPTION>
Maturity and repricing data for debt securities: 1999 1998
Fixed rate debt securities with a Weighted Weighted
remaining maturity of: 1999 1998 Average Yield Average Yield
------- ------- ------------- -------------
<S> <C> <C> <C> <C>
Less than one year $ 1,599 $ 2,961 6.18% 6.21%
Over one year through five years 36,320 24,500 5.86% 6.35%
Over five years 5,265 15,608 5.97% 5.97%
------ ------
Total fixed rate debt securities 43,184 43,069 5.86% 6.20%
------ ------
Total debt securities $43,184 $43,069 5.86% 6.20%
====== ======
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION
LOAN PORTFOLIO
Loans consisted of the following, as extracted from the Call Reports of December
31, 1999 and 1998, in thousands:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Loans Receivable
Loans secured by real estate:
Construction and land development $ 31,464 $ 24,715
Secured by farmland 7,252 5,635
Secured by 1-4 family residential properties:
Revolving, open-end loans and lines of credit 9,134 8,712
All other 40,277 36,897
Secured by multifamily residential properties 1,261 1,199
Secured by nonfarm nonresidential properties 21,478 17,334
Loans to finance agricultural production and other loans to farmers 7,088 7,525
Commercial and industrial loans 26,838 28,827
Loans to individuals for household, family and other personal expenditures:
Credit cards and related plans 2,039 1,861
Other 18,767 21,503
Obligations of states and political subdivisions in the U.S.:
Tax exempt obligations 330 185
All other loans 834 1,039
Lease financing receivables 46 148
Less: Unearned income on loans (232) (197)
-------- --------
Total loans 166,576 155,383
Allowance for loan losses (2,350) (1,945)
-------- --------
Net loans $164,226 $153,438
======== ========
Loans restructured None None
Commitments and contingencies
Commitments to make loans $ 34,864 $ 32,149
======== ========
Standby letters of credit $ 1,594 $ 1,940
======== ========
</TABLE>
CERTAIN LOAN MATURITIES
The maturities and carrying amounts of certain loans as of December 31, 1999 are
summarized as follows (in thousands):
Real Estate
Commercial Construction
Financial and Land
Agricultural Development Total
------------ ----------- -----
Due within one year $ 24,491 $ 25,704 $ 50,195
-------- -------- --------
Due after one year to five years:
Fixed rate 28,612 3,812 32,424
Variable rate 6,307 1,898 8,205
-------- -------- --------
34,919 5,710 40,629
-------- -------- --------
Due after five years:
Fixed rate 1,410 32 1,442
Variable rate 1,510 - 1,510
-------- -------- --------
2,920 32 2,952
-------- -------- --------
Total $ 62,330 $ 31,446 $ 93,776
======== ======== ========
14
<PAGE>
MANAGEMENT'S DISCUSSION
Risk Elements
Past due and nonaccrual loans, in thousands, as extracted from the Call Reports
of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) past due 30 past due 90
through 89 days days or more
and still accruing and still accruing nonaccrual
------------------ ------------------ ----------
1999 1998 1999 1998 1999 1998
----- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $ 448 $ 773 $ 633 $ 138 $ 203 $ 219
Installment loans 335 418 144 132 87 52
Credit cards and related plans 61 50 11 17 - -
Commercial and all other loans 84 203 49 218 56 243
----- ------ ----- ----- ----- -----
Total $ 928 $1,444 $ 837 $ 505 $ 346 $ 514
===== ===== ===== ===== ===== =====
Agricultural loans included above $ 154 $ 208 $ - $ 96 $ 12 $ 61
===== ===== ===== ===== ===== =====
</TABLE>
Foreclosed assets (included in other assets) are $501,013 and $517,154 at
December 31, 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES AND SUMMARY OF LOAN LOSS EXPERIENCE
As a matter of policy, the Bank maintains an allowance for loan losses. The
allowance for loan losses is created by direct charges to income, and losses on
loans are charged against the allowance when realized. The amount of the
allowance is based upon an evaluation of the portfolio, current economic
conditions, historical loan loss experience, and other factors management deems
appropriate. The Bank's management believes its allowance for loan losses is
adequate under existing economic conditions.
The following table summarizes the Bank's loan loss experience for the years
ending December 31, 1999, 1998 and 1997:
(in thousands) 1999 1998 1997
------ ------ ------
Balance at beginning of period $1,945 $1,725 $1,440
Chargeoffs:
Commercial and other 209 187 251
Real estate 36 298 109
Installment loans to individuals 286 361 134
Credit cards and related plans 53 41 43
------ ------ ------
584 887 537
------ ------ ------
Recoveries:
Commercial and other 53 15 1
Real estate 2 27 --
Installment loans 71 68 34
Credit cards and related plans 6 4 2
------ ------ ------
132 114 37
------ ------ ------
Net chargeoffs 452 773 500
------ ------ ------
Additions charged to operations 857 993 785
------ ------ ------
Balance at end of year $2,350 $1,945 $1,725
====== ====== ======
Ratio of net chargeoffs during
the year to average gross loans
outstanding during the year 0.274% 0.504% 0.383%
15
<PAGE>
MANAGEMENT'S DISCUSSION
DEPOSITS
For each category of total deposits which has an average for the year in excess
of 10 percent of average total deposits, the average balance and the average
rates as of December 31, 1999 and 1998 are as follows:
($ in thousands) average balance average rate
--------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
Demand $ 30,505 $ 26,872 - -
Time $125,278 $121,040 5.31% 5.84%
Time certificates in amounts of $100,000 or more outstanding at December 31,
1999 by maturity are as follows: ($ in thousands)
Three months or less $31,316
Over three months through twelve months 16,970
Over twelve months through three years 2,610
Over three years 474
-------
Total $51,370
=======
BORROWINGS
The Bank borrows funds principally from the Federal Home Loan Bank of Atlanta.
Information regarding such borrowings is as follows ($ in thousands):
1999 1998
---- ----
Balance outstanding at December 31 $ 12,200 $ 3,770
Weighted average rate at December 31 4.79% 5.56%
Maximum borrowings during the year $ 12,200 $ 6,320
Average amounts outstanding during year $ 5,583 $ 3,343
Weighted average rate during year 5.43% 5.65%
KEY RATIOS
The following schedule of key ratios is presented for the years ended December
31, 1999 and 1998:
1999 1998
---- ----
Return on average assets 1.41% 1.26%
Return on average equity 14.87% 14.08%
Dividend payout ratio 19.30% 21.24%
Equity to assets (averages) 9.46% 8.94%
Ending equity to ending assets 9.46% 9.12%
Average interest earning assets
to average total assets 94.12% 93.68%
Average net loans to average total deposits 85.08% 83.72%
Average interest bearing liabilities to
average interest earning assets 80.26% 81.93%
16
<PAGE>
Management's Discussion
COMPETITION
Commercial banking in North Carolina is extremely competitive in large
part due to statewide branching. The Bank competes in its market areas with some
of the largest banking organizations in the state and the country and other
financial institutions, such as federally and state-chartered savings and loan
institutions and credit unions, as well as consumer finance companies, mortgage
companies and other lenders engaged in the business of extending credit. Many of
the Bank's competitors have broader geographic markets and higher lending limits
than those of the Bank and are also able to provide more services and make
greater use of media advertising.
The enactment of legislation authorizing interstate banking has caused
great increases in the size and financial resources of some of the Bank's
competitors. In addition, as a result of interstate banking, out-of-state
commercial banks may acquire North Carolina banks and heighten the competition
among banks in North Carolina. Despite the competition in its market areas, the
Bank believes that it has certain competitive advantages that distinguish it
from its competition. The Bank believes that its primary competitive advantages
are its strong local identity, its affiliation with the community and its
emphasis on providing specialized services to small and medium-sized business
enterprises, as well as professional and upper-income individuals. The Bank
offers customers modern, high-tech banking without forsaking community values,
such as prompt, personal service and friendliness. The Bank offers many
personalized services and attracts and retains customers by being responsive and
sensitive to their individualized needs. The Bank also relies on goodwill and
referrals from shareholders and satisfied customers, as well as traditional
media to attract new customers. To enhance a positive image in the community,
the Bank supports and participates in local events and its officers and
directors serve on boards of local civic and charitable organizations.
FORWARD LOOKING INFORMATION
Information set forth in this Annual Report to Shareholders under the
caption "Managements Discussion and Analysis of Financial Conditions and Results
of Operations" contains various "forward looking" statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which statements represent the
Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Companys actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology, such as "may", "will",
"expect", "anticipate", "estimate", or "continue" or the negative thereof or
other variations thereof or comparable terminology. The Company cautions that
any such forward looking statements are further qualified by important factors
that could cause the Company's actual operating results to differ materially
from those in the forward looking statements, including without limitation, the
effects of future economic conditions, governmental fiscal and monetary
policies, legislative and regulatory changes, the risks of changes in interest
rates on the level and composition of deposits, the effects of competition from
other financial institutions, the failure of assumptions underlying the
establishment of the allowance for possible loan losses, the low trading volume
of the Common Stock and other considerations described in connection with
specific forward looking statements.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING PLOT POINTS:
FOUR OAKS FINCORP, INC.
FIVE YEAR PERFORMANCE INDEX
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
FOUR OAKS FINCORP, INC. 100 177 217 251 386 427
INDEPENDENT BANK INDEX 100 122 155 235 246 222
NASDAQ INDEX 100 141 174 213 300 542]
17
<PAGE>
Report Of Independent Accountants
The Board of Directors and Shareholders
Four Oaks Fincorp, Inc.
Four Oaks, North Carolina
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income, of shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Four Oaks Fincorp, Inc. and subsidiary at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 12, 2000
18
<PAGE>
Financial Statements
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
ASSETS 1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 10,415,507 $ 7,949,632
Interest bearing bank balances 3,934,054 669,919
Securities available for sale 43,184,107 43,069,727
FHLB stock and other equity securities 695,548 622,348
Loans, net 164,226,086 153,438,491
Bank premises and equipment, net 4,774,680 4,982,206
Other assets 4,234,646 3,643,733
------------- -------------
Total assets $ 231,464,628 $ 214,376,056
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Deposits:
Noninterest-bearing $ 31,058,592 $ 29,703,444
Large denomination certificates of deposit 51,369,668 45,378,666
Other interest-bearing 112,282,277 113,342,474
------------- -------------
Total deposits 194,710,537 188,424,584
------------- -------------
Borrowed funds 12,200,000 3,770,000
Other liabilities 2,657,300 2,638,236
------------- -------------
Total liabilities 209,567,837 194,832,820
------------- -------------
Commitments and contingencies (Notes 6, 12, and 13)
Shareholders' equity:
Common stock, $1.00 par value, 5,000,000 shares authorized;
1,366,530 and 1,349,039 issued and outstanding at December 31,
1999 and 1998, respectively 1,366,530 1,349,039
Capital surplus 6,282,211 5,785,881
Retained earnings 14,793,266 12,293,449
Accumulated other comprehensive income (loss) (545,216) 114,867
------------- -------------
Total shareholders' equity 21,896,791 19,543,236
------------- -------------
Total liabilities and shareholders' equity $ 231,464,628 $ 214,376,056
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans $ 15,850,562 $ 15,093,772 $ 12,765,165
Securities:
Taxable U.S. Government and agency obligations 2,086,097 1,920,270 1,712,768
Tax-exempt obligations of states and
political subdivisions 200,303 215,689 290,714
Other taxable securities 51,937 51,673 94,314
Overnight investments 146,700 181,687 78,856
------------ ------------ ------------
Total interest income 18,335,599 17,463,091 14,941,817
------------ ------------ ------------
Interest expense:
Deposits 7,358,675 7,934,518 6,735,764
Borrowed funds 302,925 189,417 309,624
------------ ------------ ------------
Total interest expense 7,661,600 8,123,935 7,045,388
------------ ------------ ------------
Net interest income 10,673,999 9,339,156 7,896,429
Provision for loan losses 857,116 993,085 784,851
------------ ------------ ------------
Net interest income after provision for loan losses 9,816,883 8,346,071 7,111,578
------------ ------------ ------------
Noninterest income
Service charges on deposit accounts 919,812 874,870 802,908
Other service charges, commissions & fees 676,484 476,101 461,278
Securities net gains (losses) (13,748) 48,523 (3,910)
Gain on sale of loans 162,569 46,394 -
------------ ------------ ------------
Total noninterest income 1,745,117 1,445,888 1,260,276
------------ ------------ ------------
Noninterest expense:
Salaries 3,092,228 2,656,179 2,307,500
Employee benefits 565,822 482,447 408,752
Occupancy expenses 240,833 231,317 245,732
Equipment expenses 431,380 377,550 327,364
Other operating expense 2,330,356 2,166,346 1,885,244
------------ ------------ ------------
Total noninterest expense 6,660,619 5,913,839 5,174,592
------------ ------------ ------------
Income before income taxes 4,901,381 3,878,120 3,197,262
Provision for income taxes 1,805,000 1,300,000 1,075,700
------------ ------------ ------------
Net income $ 3,096,381 $ 2,578,120 $ 2,121,562
============ ============ ============
Net income per common share - basic $ 2.28 $ 1.93 $ 1.67
============ ============ ============
Net income per common share - diluted $ 2.27 $ 1.93 $ 1.65
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31
-----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income: $3,096,381 $2,578,120 $ 2,121,562
---------- ---------- ----------
Unrealized gain (loss) on available for sale securities (1,113,631) 6,019 107,018
Reclassification of net gains recognized in net income 13,748 (48,523) 3,910
Income tax (expense) benefit relating to unrealized gain
(loss) on available for sale securities 439,800 17,501 (20,000)
---------- ---------- ----------
Other comprehensive income (loss) (660,083) (25,003) 90,928
---------- ---------- ----------
Comprehensive income $2,436,298 $2,553,117 $2,212,490
========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------------- Capital Retained Comprehensive
Shares Amount Surplus Earnings Income
--------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,256,923 $1,256,923 $ 4,452,649 $ 8,604,138 $ 48,942
Cash dividends of $.37 per share - - - (476,287) -
Change in net unrealized gain (loss) on
securities available for sale - - - - 90,928
Sale of common stock 56,549 56,549 711,593 - -
Net income - - - 2,121,562 -
--------- ---------- ----------- ------------ --------
Balance, December 31,1997 1,313,472 1,313,472 5,164,242 10,249,413 139,870
Cash dividends of $.41 per share - - - (534,084) -
Cash paid for fractional shares created by
three-for-two stock split - - (4,104) - -
Change in net unrealized gain (loss)
on securities available for sale - - - - (25,003)
Sale of common stock 35,567 35,567 625,743 - -
Net income - - - 2,578,120 -
--------- ---------- ----------- ------------ --------
Balance, December 31, 1998 1,349,039 1,349,039 5,785,881 12,293,449 114,867
Cash dividends of $.44 per share - - (596,564) -
Change in net unrealized gain (loss) on
securities available for sale - - - - (660,083)
Sale of common stock 17,491 17,491 496,330 - -
Net income - - - 3,096,381 -
--------- ---------- ----------- ------------ --------
Balance, December 31, 1999 1,366,530 $1,366,530 $ 6,282,211 $ 14,793,266 $ (545,216)
========= ========== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,096,381 $ 2,578,120 $ 2,121,562
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses 857,116 993,085 784,851
Provision for depreciation 358,943 347,915 310,539
Amortization of intangible assets 34,092 34,092 24,239
Deferred income tax benefit (200,950) (98,750) (24,800)
Net (accretion) amortization of bond premiums and discounts 3,757 (11,261) (7,164)
(Gain) on sale of loans (162,569) (46,394) -
(Gain) loss on sale of securities 13,748 (48,523) 3,910
(Gain) loss on sale of real estate and repossessed assets 17,347 (41,768) 35,516
Loss (gain) on sale of fixed assets 45,376 12,939 (13,178)
Changes in assets and liabilities:
Prepaid and other assets (198,353) 563,645 (125,609)
Interest receivable 197,956 (461,948) 45,240
Income taxes and other liabilities 140,559 191,499 (107,776)
Interest payable (121,495) 230,778 416,804
------------ ------------ ------------
Net cash provided by operating activities 4,081,908 4,243,429 3,464,134
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 15,547,179 24,874,345 11,739,608
Proceeds from maturities of securities available for sale 2,946,125 3,808,116 8,080,000
Proceeds from redemption of FHLB stock - 407,600 392,300
Purchase of securities available for sale (19,725,074) (37,683,005) (17,119,068)
Purchase of FHLB stock (73,200) - (969,400)
Net increase in loans (11,136,542) (16,658,583) (30,967,952)
Capital expenditures (348,924) (313,343) (1,010,873)
Proceeds from sale of fixed assets 152,131 62,166 71,923
Acquisition of real estate - - (46,200)
Proceeds from sale of real estate and repossessed assets 378,499 89,643 162,866
Expenditures on other real estate owned (725,305) -
------------ ------------ ------------
Net cash used in investing activities (12,985,111) (25,413,061) (29,666,796)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from borrowed funds 8,430,000 770,000 3,000,000
Net increase in deposit accounts 6,285,953 20,436,647 25,144,962
Deferral of organizational costs - - (99,181)
Proceeds from issuance of common stock 513,823 548,177 593,302
Cash dividends paid (596,564) (534,084) (476,287)
------------ ------------ ------------
Net cash provided by financing activities 14,633,212 21,220,740 28,162,796
------------ ------------ ------------
Net increase in cash and cash equivalents 5,730,009 51,108 1,960,134
Cash and cash equivalents at beginning of year 8,619,551 8,568,443 6,608,309
------------ ------------ ------------
Cash and cash equivalents at end of year $ 14,349,560 $ 8,619,551 $ 8,568,443
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Notes To Consolidated
Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and transactions of
Four Oaks Fincorp, Inc. (the "Company"), a bank holding company incorporated
under the laws of the State of North Carolina, and its wholly-owned subsidiary,
Four Oaks Bank & Trust Company (the "Bank"). All significant intercompany
transactions have been eliminated.
NATURE OF OPERATIONS
The Company was incorporated under the laws of the State of North Carolina on
February 5, 1997 (see Note 2). The Companys primary function is to serve as the
Holding Company for its wholly-owned subsidiary, the Bank. The Bank operates
seven offices in eastern and central North Carolina, and its primary source of
revenue is derived from loans to customers and from its securities portfolio.
The loan portfolio is comprised mainly of real estate, commercial, consumer, and
equity line of credit loans. These loans are primarily collateralized by
residential and commercial properties, commercial equipment, and personal
property.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS AND CERTAIN
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at December 31, 1999 and 1998 and the reported
amounts of revenues and expenses during the years ended December 31, 1999, 1998
and 1997. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company follow generally accepted
accounting principles and general practices within the financial services
industry. Following is a summary of the more significant policies.
SECURITIES
Securities are classified into three categories:
(1) Securities Held to Maturity - Debt securities that the Company has the
positive intent and the ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost;
(2) Trading Securities - Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and
(3) Securities Available for Sale - Debt and equity securities not classified
as either securities held to maturity or trading securities are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as other comprehensive income, a separate component of
shareholders equity.
The Company has historically classified all securities as available for sale.
Gains and losses on sales of securities, computed based on specific
identification of adjusted cost of each security, are included in other income
at the time of the sale. Premiums and discounts are amortized into interest
income using the interest method over the period to maturity.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding.
Loan origination fees are deferred, as well as certain direct loan origination
costs. Such costs and fees are recognized as an adjustment to yield over the
contractual lives of the related loans utilizing the interest method.
The Company evaluates its loan portfolio in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure". Under these
standards, a loan is considered impaired, based on current information and
events, if it is probable that the Company will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows discounted
at the historical effective interest rate, while all collateral-dependent loans
are measured for impairment based on the fair value of the collateral.
At December 31, 1999, the recorded investment in loans which have been
identified as impaired loans in accordance with SFAS 114 totaled $684,000. The
average balance during 1999 for impaired loans was approximately $555,000. Total
income related to impaired loans from the point in time when those loans were
deemed to be impaired as reflected in the 1999 Statement of Operations was
approximately $5,000. At December 31, 1998, there were no loans material to the
consolidated financial statements considered to be impaired.
23
<PAGE>
Notes To Consolidated
Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company uses several factors in determining if a loan is impaired under SFAS
No. 114. The internal asset classification procedures include a thorough review
of significant loans and lending relationships and the accumulation of related
data. This data includes loan payment status, borrowers financial data and
borrowers operating factors such as cash flows, operating income or loss, etc.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collection of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
probable losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect the
borrowers ability to pay. Because these factors may change, it is possible that
managements assessment of the allowance may change.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged-off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to the principal outstanding, except in the
case of loans with scheduled amortizations where the payment is generally
applied to the oldest payment due. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially charged-off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the allowance
for loan losses until prior charge-offs have been fully recovered.
FORECLOSED ASSETS
Assets acquired as a result of foreclosure are valued at the lower of the
recorded investment in the loan or fair value less estimated costs to sell. The
recorded investment is the sum of the outstanding principal loan balance and
foreclosure costs associated with the loan. Losses from the acquisition of
property in full or partial satisfaction of debt are treated as credit losses.
Routine holding costs, subsequent declines in value, and gains or losses on
disposition are included in other income and expense.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of assets. Useful lives range from 5 to 10 years for furniture and
equipment and is 35 years for premises. Expenditures for repairs and maintenance
are charged to expense as incurred.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In accourance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company applies a
financial-components approach that focuses on control when accounting and
reporting for transfers and servicing of financial assets and extinguishments of
liabilities. Under that approach, after a transfer of financials assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This approach
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Due to the small
number of transactions and the immateriality of the revenue associated with
these transactions, there was no material impact on results of operations or
financial position due to the adoption of this statement.
INCOME TAXES
Provisions for income taxes include amounts currently payable and deferred taxes
on temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax asset and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision of income taxes in the
year of change.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and overnight interest bearing bank balances.
24
<PAGE>
Notes To Consolidated
Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SEGMENT INFORMATION
During the year ended December 31, 1998, the Company adopted the provisions of
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The statement requires that public business enterprises report
certain information about operating segments in their annual financial
statements and in condensed financial statements of interim periods issued to
shareholders. It also requires that the public business enterprises report
related disclosures and descriptive information about products and services
provided by significant segments, geographic areas, and major customers,
differences between the measurements used in reporting segment information and
those used in the enterprises general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources, and in assessing
performance. The Company has determined that it has one significant operating
segment, the providing of general commercial financial services to customers
located in the single geographic area of Eastern North Carolina. The various
products are those generally offered by community banks, and the allocation of
resources is based on the overall performance of the institution, versus the
individual branches or products.
RECLASSIFICATIONS
Certain items included in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation. These reclassifications have
no effect on the net income or shareholders equity previously reported.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the provisions of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended, effective with the fiscal
quarter beginning July 1, 2000. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that derivatives be recognized as either assets or liabilities in the
balance sheet and be measured at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
whether or not the derivative is designated as a hedging instrument. SFAS No.
133 is not expected to have a material effect on the Companys financial
statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," was issued in October 1998. This statement amends existing
classification and accounting treatment of mortgage-backed securities, retained
after mortgage loans held for sale are securitized, for entities engaged in
mortgage banking activities. These securities previously were classified and
accounted for as trading and now may be classified as held-to-maturity or
available-for-sale, also. This statement was effective for the first fiscal
quarter beginning after December 15, 1998. SFAS No. 134 did not have a material
effect on the Company's financial statements.
2. FORMATION OF HOLDING COMPANY
The Company was incorporated on February 5, 1997 under the laws of the State of
North Carolina for the purpose of serving as the holding company for the Bank.
On July 1, 1997, pursuant to the reorganization of the Bank into a holding
company structure, the common stock of the Bank was converted on a
share-for-share basis into common stock in the Company that have rights,
privileges and preferences identical to the common stock of the Bank. This
transaction was accounted for as if it were a pooling of interests.
25
<PAGE>
Notes To Consolidated
Financial Statements
3. SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated market values of securities available for sale as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
1999:
U.S. Government and agency securities $39,915,003 $ 358 $934,905 $38,980,456
State and municipal securities 4,177,620 47,629 21,598 4,203,651
----------- -------- -------- -----------
$44,092,623 $ 47,987 $956,503 $43,184,107
=========== ======== ======== ===========
1998:
U.S. Government and agency securities $38,977,568 $102,606 $ 76,659 $39,003,515
State and municipal securities 3,900,792 168,119 2,699 4,066,212
----------- -------- -------- -----------
$42,878,360 $270,725 $ 79,358 $43,069,727
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1999 by contractual maturities are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 1,596,317 $ 1,599,010
Due after one year through five years 37,166,330 36,319,685
Due after five years through ten years 4,410,877 4,365,117
Due after ten years 919,100 900,295
----------- -----------
$44,092,624 $43,184,107
=========== ===========
Assets, principally securities, with a carrying value of approximately
$9,075,000 and $9,259,000 at December 31, 1999 and 1998, respectively, were
pledged to secure public deposits and for other purposes required or permitted
by law.
Sales of securities available for sale during 1999, 1998 and 1997 generated
realized gains of $18,246, $48,523 and $57,862, and realized losses of $31,994
and $61,772 during 1999 and 1997. No losses were realized during 1998.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans as of December 31, 1999 and 1998 are summarized
as follows (in thousands):
1999 1998
-------- --------
Real estate - residential and other $103,614 $ 88,857
Real estate - agricultural 7,252 5,635
Other agricultural 7,088 7,525
Consumer loans 20,806 23,364
Business loans 26,838 28,827
Other loans 1,210 1,372
-------- --------
166,808 155,580
Less:
Unearned income and deferred loan fees (232) (197)
Allowance for loan losses (2,350) (1,945)
-------- --------
$164,226 $153,438
======== ========
26
<PAGE>
Notes To Consolidated
Financial Statements
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Nonperforming assets at December 31, 1999 and 1998 consist of the following (in
thousands):
1999 1998
------ ------
Loans past due ninety days or more $ 837 $ 505
Nonaccrual loans 346 514
Foreclosed assets (included in other assets) 501 517
------ ------
$1,684 $1,536
====== ======
A summary of the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
---------- ---------- ----------
Balance, beginning $1,945,000 $1,725,000 $1,440,000
Provision charged against income 857,116 993,085 784,851
Recoveries of amounts charged-off 136,222 113,555 37,153
Amounts charged-off (588,338) (886,640) (537,004)
---------- ---------- ----------
Balance, ending $2,350,000 $1,945,000 $1,725,000
========== ========== ==========
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Land $1,043,642 $1,211,381
Building 3,180,811 3,105,483
Furniture and equipment 3,037,203 2,814,383
---------- ----------
7,261,656 7,131,247
Less accumulated depreciation (2,486,976) (2,149,041)
---------- ----------
$4,774,680 $4,982,206
========== ==========
6. FHLB STOCK AND OTHER EQUITY SECURITIES
The Company, as a member of the Federal Home Loan Bank system, is required to
maintain an investment in capital stock of the FHLB. No ready market exists for
the FHLB stock, and it has no quoted market value. The balance of FHLB stock
held at December 31, 1999 and 1998 was $643,000 and $569,800, respectively.
7. DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows (in thousands):
2000 $108,995
2001 11,000
2002 2,958
2003 693
2004 3,642
Thereafter 124
--------
$127,412
========
8. BORROWED FUNDS
The Company has an established line of credit with the Federal Home Loan Bank of
Atlanta in the amount of $25,000,000. This line is secured by a blanket floating
lien covering the Company's loan portfolio of qualifying residential (1-4 units)
first mortgage loans. At December 31, 1999, the Company had advances of
$4,000,000 and $2,000,000 outstanding. The fixed interest rates on these
advances were 5.07% and 4.95% respectively, and they mature on August 7, 2009
and September 30, 2009, respectively. At December 31, 1998, the Company had an
advance of $3,000,000 outstanding. At December 31, 1999, the Company also had an
advance of daily rate credit of $6,200,000 at an overnight rate of 4.55%.
27
<PAGE>
Notes To Consolidated
Financial Statements
9. INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997 are as follows:
1999 1998 1997
---------- ---------- ----------
Current:
Federal $1,755,950 $1,273,750 $ 985,000
State 250,000 125,000 115,500
---------- ---------- ----------
2,005,950 1,398,750 1,100,500
Deferred (200,950) (98,750) (24,800)
---------- ---------- ----------
Total $1,805,000 $1,300,000 $1,075,700
========== ========== ==========
The reconciliation of expected income tax at the statutory Federal rate of 34%
with income tax expense for the years ended December 31, 1999, 1998 and 1997 is
as follows:
1999 1998 1997
---------- ---------- ----------
Expected income tax expense $1,666,000 $1,320,000 $1,087,000
Increase (decrease) in income tax
expense resulting from:
State taxes (net of federal benefit) 116,000 80,000 70,000
Tax exempt income (57,800) (73,000) (99,000)
Other, net 80,800 (27,000) 17,700
---------- ---------- ----------
Income tax expense $1,805,000 $1,300,000 $1,075,700
========== ========== ==========
A summary of the deferred tax assets (liabilities) at December 31, 1999 and
1998, included in other assets, is as follows:
1999 1998
-------- --------
Allowance for loan losses $863,200 $713,000
Depreciation (316,000) (339,000)
Bond accretion (1,700) (15,000)
Unamortized loan costs and fees 87,000 72,550
-------- --------
632,500 431,550
Unrealized gains on available for
sale securities 363,300 (76,500)
-------- --------
Net deferred tax asset $995,800 $355,050
======== ========
10. EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution pension plan in effect for substantially all
full-time employees. Employee benefits expense includes $151,749, $165,207 and
$94,808 in 1999, 1998 and 1997, respectively, for this plan. Contributions under
the plan are made at the discretion of the Board of Directors, but have amounted
to 5% of eligible employees gross salary for the past three years.
11. STOCK SPLIT
On June 22, 1998, the Company declared a three-for-two split of the Companys
common stock, effected in the form of a stock dividend paid on July 21, 1998 to
shareholders of record on July 6, 1998. The dividend was charged to capital
surplus in the aggregate amount of $445,664, the par value of the shares paid.
All references to number of shares, except shares authorized, and to per share
information have been restated to reflect the dividend.
28
<PAGE>
Notes To Consolidated
Financial Statements
12. REGULATORY RESTRICTIONS
The Bank, as a North Carolina banking corporation, may pay dividends to the
Company only out of undivided profits as determined pursuant to North Carolina
General Statutes Section 53-87. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a limitation is
in the public interest and is necessary to ensure the financial soundness of the
bank.
Current Federal regulations require that the Bank maintain a minimum ratio of
total capital to risk weighted assets of 8%, with at least 4% being in the form
of Tier 1 capital, as defined in the regulations. In addition, the Bank must
maintain a leverage ratio of 4%. As of December 31, 1999, the Banks capital
exceeded the current capital requirements. The Bank currently expects to
continue to exceed these minimums without altering current operations or
strategy.
The Bank is subject to various regulatory capital requirements administered by
the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks financial statements. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios, as set forth in the table below. Management
believes, as of December 31, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum amounts and ratios, as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks category.
The Banks actual capital amounts and ratios are also presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
- ------------------------
Total Capital (to Risk Weighted Assets) $23,469 13.4% $14,014 8.0% $17,518 10.0%
Tier I Capital (to Risk Weighted Assets) 21,119 12.1 7,007 4.0 10,511 6.0
Tier I Capital (to Average Assets) 21,119 9.3 9,116 4.0 11,395 5.0
As of December 31, 1998:
- ------------------------
Total Capital (to Risk Weighted Assets) $20,237 12.3% $13,122 8.0% $16,402 10.0%
Tier I Capital (to Risk Weighted Assets) 18,292 11.2 6,561 4.0 9,841 6.0
Tier I Capital (to Average Assets) 18,292 8.6 8,524 4.0 10,655 5.0
</TABLE>
The Company is also subject to these capital requirements. At December 31, 1999
and 1998, the Companys total capital to risk weighted assets, Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets were 12.8% and 12.9%,
12.7% and 11.7%, and 9.8% and 9.0%, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, lines of credit and
standby letters of credit. These instruments involve elements of credit risk in
excess of amounts recognized in the accompanying financial statements.
The Bank's risk of loss in the event of nonperformance by the other party to the
commitment to extend credit, line of credit or standby letter of credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments under such instruments as it does for
on-balance sheet instruments. The amount of collateral obtained, if any, is
based on managements credit evaluation of the borrower. Collateral held varies,
but may include accounts receivable, inventory, real estate and time deposits
with financial institutions. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
As of December 31, 1999 and 1998, outstanding financial instruments whose
contract amounts represent credit risk were as follows:
1999 1998
----------- -----------
Outstanding commitments to lend, unfunded loans and
lines of credit $34,864,000 $32,149,000
=========== ===========
Standby and commercial letters of credit $ 1,594,000 $ 1,940,000
=========== ===========
The Bank's lending is concentrated primarily in eastern and central North
Carolina and the surrounding communities in which it operates. Credit has been
extended to certain of the Banks customers through multiple lending
transactions.
29
<PAGE>
Notes To Consolidated
Financial Statements
14. RELATED PARTY TRANSACTIONS
Loans outstanding to related parties at December 31, 1999 and 1998 were $828,000
and $811,000, respectively.
The Bank leased a building from one of its directors for $806, $800, and $780
per month in 1999, 1998 and 1997, respectively. The term of the lease has
historically been on a year to year basis, but was changed to a five year lease
as of January 1, 1995 with annual increases based on the Consumer Price Index.
15. STOCK OPTION PURCHASE PLAN
The Company has a non-qualified stock option plan (the "Plan") for certain key
employees under which it is authorized to issue options for up to 100,000 shares
of common stock. Options granted at the discretion of the Board at a price
approximating market, as determined by a committee of Board members. All options
granted subsequent to a 1997 amendment will be 100% vested one year from the
grant date and will expire after such a period as is determined by the Board at
the time of grant. Options granted prior to the amendment have ten year lives
and a five year level vesting provision.
A summary of the status of the Banks stock options, after given retroactive
effect to stock splits, as of December 31, 1999, 1998 and 1997, and changes
during the years ending on those dates is presented below:
Options Option Price
Outstanding Per Share
----------- ---------
Balance December 31, 1996 64,000 $7.20 - 8.87
Granted 3,750 $17.33
Exercised (42,799) $8.00 - 8.87
-----------
Balance December 31, 1997 24,951 $7.20 - 17.33
Granted 17,700 $21.33 - 22.17
Exercised (18,701) $7.20 - 17.33
-----------
Balance December 31, 1998 23,950 $7.20 - 22.17
Granted 18,695 $29.00
Exercised (3,000) $17.33 - 21.33
-----------
Balance December 31, 1999 39,645 $7.20 - 29.00
===========
The weighted average exercise price of all outstanding options at December 31,
1999 is $23.76. There are 32,045 shares reserved for future issuance at December
31, 1999.
Additional information concerning the Company's stock options is as follows:
Remaining
Number Contractual Number
Outstanding Life Exercisable
Exercise Price at 12/31/99 at 12/31/99 at 12/31/99
----------- ----------- -----------
$7.20 1,500 2.2 years 1,500
$8.87 1,200 5.2 years 1,161
$17.33 3,250 7.2 years 1,794
$21.33 12,300 2.3 years 12,300
$22.17 2,700 2.4 years 2,700
$29.00 18,695 3.2 years -
----------- -----------
39,645 19,455
=========== ===========
On January 1, 1996 the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation". As permitted by SFAS No. 123, the Company has chosen to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for the Plan. However, the Company is required to
disclose the pro forma effects on net income using the new fair value based
method. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1999, 1998 and 1997:
30
<PAGE>
Notes To Consolidated
Financial Statements
15. STOCK OPTION PURCHASE PLAN (Continued)
1999 1998 1997
---- ---- ----
Dividend growth 9% 7% 7%
Expected volatility 20.260% 22.360% 7.853%
Risk free interest rate 5.40% 5.40% 5.85%
Expected life 4 years 4 years 10 years
The weighted average fair value of options granted during 1999, 1998 and 1997
was $6.29, $7.14 and $5.51, respectively.
Had compensation cost for the Company's stock-based compensation plan, as
described above, been determined consistent with SFAS No. 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income:
As reported $ 3,096,381 $ 2,578,120 $ 2,121,562
Pro forma 3,036,371 2,526,498 2,109,455
Net income per share - Basic:
As reported $ 2.28 $ 1.93 $ 1.67
Pro forma 2.24 1.89 1.66
Net income per share - Diluted:
As reported $ 2.27 $ 1.93 $ 1.65
Pro forma 2.23 1.89 1.64
</TABLE>
16. EARNINGS PER SHARE
The following table provides a reconciliation of income available to common
stockholders and the average number of shares outstanding for the years ended
December 31, 1999, 1998, and 1997.
1999 1998 1997
---------- ---------- ----------
Net income (numerator) $3,096,381 $2,578,120 $2,121,562
========= ========= =========
Shares for basic EPS (denominator) 1,355,924 1,333,163 1,270,571
Dilutive effect of stock options 6,787 4,923 18,461
---------- ---------- ----------
Adjusted shares for diluted EPS 1,362,711 1,338,086 1,289,032
========= ========= =========
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Four Oaks Fincorp, Inc., the parent company,
at December 31, 1999, 1998 and 1997 and for the years ended December 31, 1999
and 1998 and the period from February 5, 1997 to December 31, 1997 is presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Condensed Balance Sheets
Assets:
Cash and cash equivalents $ 981,798 $ 903,607 $ 60,791
Equity investment in subsidiary 20,862,424 18,561,451 16,420,787
Other assets 52,519 78,178 385,419
------------ ------------ ------------
Total assets $ 21,896,741 $ 19,543,236 $ 16,866,997
============ ============ ============
Liabilities and shareholders equity:
Shareholders equity $ 21,896,741 $ 19,543,236 $ 16,866,997
============ ============ ============
Condensed Statements of Operations
Dividends from wholly-owned subsidiary $ 148,394 $ 534,084 $ 241,187
Interest from wholly-owned subsidiary 29,995 32,858 --
Equity in earnings of subsidiary 2,948,386 2,056,638 1,890,228
Miscellaneous expenses (30,394) (45,460) (9,853)
------------ ------------ ------------
Net income $ 3,096,381 $ 2,578,120 $ 2,121,562
============ ============ ============
</TABLE>
31
<PAGE>
Notes To Consolidated
Financial Statements
17. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Condensed Statements of Cash Flows
Operating Activities:
Net income $ 3,096,381 $ 2,578,120 $ 2,121,562
Equity in undistributed earnings of subsidiary (2,948,386) (2,056,638) (1,890,228)
Amortization of deferred organization costs 19,705 19,706 9,853
(Increase) Decrease in other assets 5,954 287,535 (296,091)
----------- ----------- -----------
Cash flows provided (used) in operating activities 173,654 828,723 (54,904)
----------- ----------- -----------
Financing activities:
Proceeds from issuance of common stock 501,101 548,177 456,063
Dividends paid (596,564) (534,084) (241,187)
Deferral of organization costs -- -- (99,181)
----------- ----------- -----------
Cash flows provided by financing activities (95,463) 14,093 115,695
----------- ----------- -----------
Net increase in cash and cash equivalents 78,191 842,816 60,791
Cash and cash equivalents, beginning of period 903,607 60,791 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 981,798 $ 903,607 $ 60,791
=========== =========== ===========
</TABLE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the disclosure of estimated fair values for financial instruments. Quoted market
prices, if available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on managements assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial instruments values and should not be considered an
indication of the fair value of the Company taken as a whole. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Cash and Due from Banks
Cash and due from banks are equal to the fair value due to the liquid nature of
the financial instruments.
Securities
Fair values of securities are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Loans Receivable
Fair values have been estimated by type of loan: residential real estate loans,
consumer loans, and commercial and other loans. For variable-rate loans that
reprice frequently and with no significant credit risk, fair values are based on
carrying values. The fair values of fixed rate loans are estimated by
discounting the future cash flows using the current rates at which loans with
similar terms would be made to borrowers with similar credit ratings and for the
same remaining maturities. The Company has assigned no fair value to off-balance
sheet financial instruments since they are either short term in nature or
subject to immediate repricing.
FHLB Stock and Other Equity Securities
The carrying amount of FHLB stock and other equity securities approximates fair
value.
Deposits
The fair value of demand deposits, savings accounts and money market deposits is
the amount payable on demand at year end. Fair value of certificates of deposit
is estimated by discounting the future cash flows using the current rate offered
for similar deposits with the same maturities.
32
<PAGE>
Notes To
Consolidated Financial Statements
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Accrued Interest Receivable and Payable
The carrying amount of accrued interest approximates market.
The following table presents information for financial assets and liabilities as
of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,350 $ 14,350 $ 8,615 $ 8,615
Securities available for sale 43,184 43,184 43,070 43,070
Residential real estate loans 103,614 103,303 88,857 88,566
Consumer loans 20,806 20,661 23,364 23,377
Commercial and other loans 42,388 42,305 43,359 43,122
FHLB stock and other equity securities 695 695 622 622
Accrued interest receivable 2,271 2,271 2,469 2,469
--------- --------- -------- ---------
Total financial assets $ 227,308 $ 226,769 $ 210,356 $ 209,841
========= ========= ======== =========
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------- --------- -------- ----------
Financial liabilities:
Federal Home Loan Bank of Atlanta advances $ 12,200 $ 12,200 $ 3,770 $ 3,770
Deposits:
Certificates of deposit 127,411 127,561 122,806 123,566
Other 67,299 67,299 65,619 65,619
Accrued interest payable 2,024 2,024 2,145 2,145
--------- --------- -------- ---------
Total financial liabilities $ 208,934 $ 209,084 $194,340 $ 195,100
========= ========= ======== =========
</TABLE>
19. CASH FLOW SUPPLEMENTAL DISCLOSURES
The following information is supplemental information regarding the cash flows
for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest on deposits and borrowed funds $7,813,090 $7,925,986 $6,628,589
Income taxes 1,818,338 1,200,450 1,057,975
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed assets - 1,153,877 120,348
Loans to facilitate the sale of foreclosed assets 345,600 781,700 -
</TABLE>
33
<PAGE>
Corporate Information
INVESTOR INFORMATION
Four Oaks Fincorp's Common Stock is currently traded through the market makers
listed below:
Morgan, Keegan & Company, Inc.
4300 Six Forks Road
Suite 400
Raleigh, NC 27609
Phone: 800-688-2137
919-781-8187
Attention: Harold Lee Snipes, Jr
Senior Vice President
Legg Mason Wood Walker, Inc.
3201 Glenwood Avenue
P.O. Box 31048
Raleigh, NC 27622-1048
Phone: 800-752-7834
919-783-0040
Attention: J. David Stubbs
Assoc. Vice President
Trades involving the stock are negotiated on a best efforts basis. As of
December 31, 1999, the approximate number of holders of record of the Common
Stock of the Company was 1,000. The Company has no other class of equity
securities.
State banking laws require that surplus of at least 50% of paid-in capital stock
be maintained in order for the Bank to declare a dividend to the Company. Cash
dividends paid by the Company in 1999 and 1998 were $0.44 and $0.41 per share.
CORPORATE INFORMATION
Annual Meeting
- --------------
The Annual Meeting of Shareholders of Four Oaks Fincorp, Inc. will be held at
6144 US 301 South, Four Oaks, North Carolina on April 24, 2000 at 8:00 PM. We
encourage all shareholders to attend.
Transfer Agent
- --------------
Shareholders desiring to transfer shares or who have questions regarding their
stock certificates should contact the Company's transfer agent:
BB&T
Corporate Trust Services
223 West Nash Street
Wilson, NC 27894
252-246-4968
1-800-213-4314
Additional Information
- ----------------------
For additional information, contact Wanda J. Blow, Vice President, Corporate
Secretary at 919-963-2177.
[PHOTO OF WANDA J. BLOW APPEARS HERE]
Wanda J. Blow, Vice President,
Corporate Secretary
This statement has not been reviewed or confirmed for accuracy or relevance by
the Securities and Exchange Commission or the Federal Deposit Insurance
Corporation.
39
EXHIBIT 21 TO FORM 10-KSB
Subsidiaries of the Registrant
------------------------------
Name State of Incorporation
- ---- ----------------------
Four Oaks Bank & Trust Company North Carolina
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Four Oaks Fincorp, Inc. on Form S-8 (File No. 333-30677) and Form S-3 (File No.
333-33527) of our report dated February 12, 2000 on our audits of the
consolidated financial statements of Four Oaks Fincorp, Inc. as of December 31,
1999 and 1998, and for each of the three years in the period ended December 31,
1999, which report is included in this Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,415
<INT-BEARING-DEPOSITS> 3,934
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,880
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,576
<ALLOWANCE> 2,350
<TOTAL-ASSETS> 231,465
<DEPOSITS> 194,711
<SHORT-TERM> 6,200
<LIABILITIES-OTHER> 2,657
<LONG-TERM> 6,000
0
0
<COMMON> 1,367
<OTHER-SE> 20,530
<TOTAL-LIABILITIES-AND-EQUITY> 231,465
<INTEREST-LOAN> 15,851
<INTEREST-INVEST> 2,338
<INTEREST-OTHER> 147
<INTEREST-TOTAL> 18,336
<INTEREST-DEPOSIT> 7,359
<INTEREST-EXPENSE> 7,662
<INTEREST-INCOME-NET> 10,674
<LOAN-LOSSES> 857
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 6,661
<INCOME-PRETAX> 4,901
<INCOME-PRE-EXTRAORDINARY> 4,901
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,096
<EPS-BASIC> 2.28
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 4.98
<LOANS-NON> 346
<LOANS-PAST> 837
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,945
<CHARGE-OFFS> 584
<RECOVERIES> 132
<ALLOWANCE-CLOSE> 2,350
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,350
</TABLE>
